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U.S. Supreme Court Upholds Theory of False Claims Act Liability

The U.S. Supreme Court ruled yesterday that corporations can face False Claims Act liability if they bill a federal payor while out of compliance with regulations even though said regulations were not explicit conditions of payment. The Court also clarified when non-compliance is or is not material to federal reimbursement. This ruling has implications for health care providers, drug makers, defense contractors and others who submit to the federal government for payment or reimbursement.

In Universal Health Services Inc. v. U.S. et al ex rel. Escobar et al., the Court debated the false claims theory of “implied certification.” According to this theory, when a corporation or in this case, a healthcare provider submits a claim, it implicitly certifies compliance with all regulations as a condition of payment. If a claim fails to disclose a violation of material statutory, regulatory, or contractual requirement, the defendant has a made a misrepresentation that renders the claim “false or fraudulent” under the False Claims Act. Therefore, submitting a claim while “knowingly” out of compliance may constitute fraud punishable by the FCA’s treble damages penalty.

The False Claims Act defines “knowing” and “knowingly” to mean that a person has “actual knowledge of the information,” or “acts in reckless disregard of the truth or falsity of the information.” A misrepresentation about compliance with a statutory, regulatory or contractual requirement must be “material” to the Government’s payment decision in order to be a violation of the False Claims Act. The Court further clarified the meaning of “material” and how that materiality requirement should be enforced.

In the False Claims Act and other federal fraud statutes, “The term ‘material’ means having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” The Court noted that the materiality standard is demanding and does not cover “minor or insubstantial” non-compliance. Furthermore, to gauge materiality, the Court opined that courts should look at whether the:

Defendant knows the Government refuses to pay claims based on non-compliance with the particular statutory, regulatory or contractual requirement, therefore considered material;

Conversely, the Government pays claims in full despite its knowledge that certain requirements were violated, therefore it is strong evidence that the requirements are not material, and;

The Government regularly pays a claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.

“Defendants can be liable for violating requirements even if they were not expressly designated as conditions of payment,” the court said in an opinion authored by Justice Clarence Thomas. “What matters is not the label the Government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.”

How does this ruling impact those who do business with the federal government? Enforcement of the False Claims Act is the government’s primary civil remedy to redress false claims for government funds and property and under government contracts. This case is considered to be one of the most significant and important False Claims Act cases in recent history and viewed as at least a partial victory for the federal government and whistleblowers. Those who do business with the federal government should take stock of their compliance programs by assessing their effectiveness to meet statutory, regulatory or contractual requirements.

“The False Claims Act has proven to be the government’s most effective civil tool to ferret out fraud and return billions to taxpayer-funded programs,” said Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division.

In fiscal 2015, the Department of Justice obtained more than $3.5 billion in settlements and judgments from civil cases involving fraud and false claims against the government. This is the fourth year in a row that the recoveries have exceeded $3.5 billion and brings the total recoveries from January 2009 to the end of fiscal 2015 to $26.4 billion. Of the $3.5 billion recovered last year $1.9 billion came from the healthcare industry for allegedly providing unnecessary or inadequate care, paying kickbacks to physicians and other providers to induce the use of goods or services, or overcharging for goods and services paid for by Medicare, Medicaid, and other federal healthcare programs. The $1.9 million reflects federal losses only. In many of the cases, additional millions of dollars was recovered for consumers and state Medicaid programs.

The next largest recoveries were from government contracts. The government depends on contractors to feed, clothe, and equip the military for combat; for the military’s planes, ships and weapons; as well as to provide everything needed to fund domestic programs such as highways and other infrastructure projects. Settlements and judgments in cases alleging false claims for payment under government contracts totaled $1.1 billion in fiscal year 2015.

The White Collar Defense Bar is already debating the impact of the newly defined materiality standard, opining what the Court described as a “new, rigorous standard of materiality,” as the impetus that will kick off a significant increase in whistleblower lawsuits, particularly by predatory plaintiff’s firms. Some are saying it may massive amounts of litigation in light of the aggressiveness of the plaintiff’s bar and their solicitation of whistleblowers. The litigation will center on what “materiality” is and the “knowledge” of compliance by providers not only in healthcare, but government contracts as well.

The one sure way to proactively combat a risk to your organization is to ensure you are in compliance with applicable laws and regulations and most importantly, have a robust compliance program that includes regular audits of its effectiveness. Failure to do so will be viewed as reckless disregard that will imply “knowledge” and thus satisfy the materiality standard to allege a false claim.